Home prices continue marching higher, but the same can't be said for Opendoor Technologies (OPEN 3.38%), whose stock has plunged 25% over the past month and is down more than 90% from its all-time high.
The real estate technology company buys homes through its website or app and resells them on an e-commerce marketplace. So why isn't Opendoor thriving if home prices are rising? Opendoor should make more money if prices go up, right?
It's not that simple. Understanding the investment opportunity requires understanding Opendoor's role in the real estate market. Only then can you determine whether the stock is a buy, sell, or hold.
What is Opendoor's business model?
Opendoor's core business involves buying homes directly from sellers and then relisting them for sale on its e-commerce marketplace. Opendoor offers sellers a streamlined sale with a cash offer and fast closing. They can also avoid any hassles related to showing the property. Opendoor charges a 5% service fee for the transaction, lower than the traditional 6% that goes to agents.
You might think of Opendoor as a house flipper, but think again. A flipper will buy a house, often a fixer-upper or a foreclosure, fix it up, and resell it for as much as possible. A flipper's profit comes from the value it adds between buying and reselling -- think repairs and upgrades.
Opendoor adds value by providing convenience to sellers. It targets homes in good condition that it can quickly turn around and resell. In other words, Opendoor is trying to buy and resell as many houses as it can -- as quickly as possible -- to collect its fees.
Is Wall Street being too pessimistic?
That's not to say home prices don't affect Opendoor's business. It got caught flat-footed last summer when a large cohort of homes dropped in value so quickly that Opendoor lost millions of dollars reselling these properties despite the fees it collects. The company took four quarters to work through that mistake and noted that new inventory is far more profitable.
Image source: Opendoor Technologies.
So why is the stock falling so much if home prices are soaring again? The combination of higher interest rates and rising prices has frozen the housing market. Few people want to move if they'll be selling a mortgage at 3% or 4% and buying a more expensive house at 7%. You can see how originations plummeted as mortgage rates rose.
Data by YCharts.
But does Wall Street have it wrong? While it's true that fewer people are moving, Opendoor is still small enough that it can find enough business to continue growing, even if the overall market is slow. Existing home sales still clocked in at 4 million over the past year, and Opendoor is only buying about 6,000 homes over the second half of this year.
Opendoor might be more selective to ensure it's only buying the best inventory right now, but it doesn't seem like there's an apparent problem here. The company has beaten analyst revenue estimates every quarter since going public in 2020, so it doesn't seem like a firm reason to avoid the stock until that changes.
Buy, sell, or hold?
That said, Opendoor remains a speculative stock. The previous inventory missteps almost destroyed the business, and investors must consider that risk until Opendoor is more established than it is today. On the other hand, a slow housing market might not spell any trouble for Opendoor if it can continue finding enough transactions in its small sliver of the real estate market. Remember, it's not a drop in housing prices that will hurt Opendoor but the speed at which prices fall.
This might even be a good environment for Opendoor if price stability lets the company revamp growth slowly and safely. Achieving and maintaining financial stability leads to obvious long-term upside. It's an e-commerce solution in the world's largest asset class, real estate. Opendoor can remain a niche option for home sellers and still multiply the size of its business many times over the coming years.
The verdict? Opendoor is a buy but only if you can stomach potential volatility and add the stock to a diversified portfolio.
